**SECURITIES
AND EXCHANGE COMMISSION**


Washington,
D.C. 20549





**FORM
10-Q**





(Mark
One)





x
    Quarterly
      Report under Section 13 or 15(d) of the Securities Exchange Act of
      1934


For the
quarterly period ended March
31, 2005 .





or





o
    Transition
      Report under Section 13 or 15(d) of the Securities Exchange Act of
      1934


For the
transition period from _______________ to ________________.





Commission
File No. 0-23980





**Georgia
Bank Financial Corporation**


(Exact
name of registrant as specified in its charter)





Georgia
    
    58-2005097(State
      of Incorporation)
    
    (I.R.S.
      Employer Identification No.)





3530
Wheeler Road, Augusta, Georgia 30909


(Address
of principal executive offices)





(706)
738-6990


(Issuer's
telephone number, including area code)





Not
Applicable


(Former
name, former address and former fiscal year, if changed since last
report)





Check
whether the issuer: (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes x No o





Check
whether the issuer is an accelerated filer (as defined in Rule 12b-2 of the
Exchange Act). Yes x No o





APPLICABLE
ONLY TO CORPORATE ISSUERS





State the
number of shares outstanding of each of the issuer's classes of common equity,
as of the latest practicable date:





5,256,807
shares of common stock, $3.00 par value per share, outstanding as of April 30,
2005.









**GEORGIA
      BANK FINANCIAL CORPORATION****FORM
      10-Q****INDEX****Page****Part
      I**Item
      1.
    Financial Statements (Unaudited)Consolidated Balance Sheets as of March 31, 2005 and
      December 31, 2004
    3Consolidated Statements of Income for the Three Months
      ended March 31, 2005 and 2004
    4Consolidated
      Statements of Cash Flows for theThree Months ended March 31, 2005
      and 2004
    6Notes to Consolidated Financial
    Statements
    8Item
      2.
    Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
    11Item
      3.
    Quantitative and Qualitative Disclosures about Market
      Risk
    23Item
      4.
    Controls and Procedures
    23**Part
      II**Other
      InformationItem
      1.
    Legal Proceedings
    *Item
      2.
    Unregistered Sales of Equity Securities and Use of
      Proceeds
    24Item
      3.
    Defaults Upon Senior Securities
    *Item
      4.
    Submission of Matters to a Vote of Security
      Holders
    *Item
      5.
    Other Information
    *Item
      6.
    Exhibits and Reports on Form 8-K
    24**Signature**
    25*
      No infomation submitted under this caption





1




PART
I


FINANCIAL INFORMATION








2





GEORGIA
BANK FINANCIAL CORPORATION AND SUBSIDIARY


Consolidated Balance Sheets


(Unaudited)





ASSETSMarch
      31,
    
    December
      31,2005
    
    2004Cash
      and due from banks
    
    $
    18,012,367
    
    $
    13,186,173Federal
      funds sold
    
    
    7,902,000
    
    
    12,326,000Interest-bearing
      deposits in other banks
    
    
    512,042
    
    
    512,024Cash
      and cash equivalents
    
    
    26,426,409
    
    
    26,024,197Investment
      securitiesAvailable-for-sale
    
    
    166,476,947
    
    
    152,637,090Held-to-maturity,
      at cost (fair values of $3,955,744 and $3,997,361,
      respectively)
    
    
    3,776,331
    
    
    3,776,428Loans
      held for sale
    
    
    14,836,202
    
    
    14,778,614Loans
    
    
    509,139,548
    
    
    479,391,209Less
      allowance for loan losses
    
    
    (8,303,038
    )
    
    (7,930,366
    )Loans,
      net
    
    
    500,836,510
    
    
    471,460,843Premises
      and equipment, net
    
    
    18,325,776
    
    
    18,437,500Accrued
      interest receivable
    
    
    3,602,690
    
    
    3,638,247Intangible
      assets, net
    
    
    139,883
    
    
    139,883Bank-owned
      life insurance
    
    
    11,546,380
    
    
    11,463,591Other
      assets
    
    
    4,914,115
    
    
    4,160,918$
    750,881,243
    
    $
    706,517,311LIABILITIES
      AND STOCKHOLDERS' EQUITYDepositsNoninterest-bearing
    
    $
    87,565,729
    
    $
    80,798,355Interest-bearing:NOW
      accounts
    
    
    84,168,916
    
    
    80,417,657Savings
    
    
    246,569,605
    
    
    225,533,029Money
      management accounts
    
    
    25,776,001
    
    
    25,142,955Time
      deposits over $100,000
    
    
    112,341,758
    
    
    106,835,743Other
      time deposits
    
    
    34,792,436
    
    
    38,056,932591,214,445
    
    
    556,784,671Federal
      funds purchased and securities sold under repurchase
      agreements
    
    
    49,289,438
    
    
    44,581,259Advances
      from Federal Home Loan Bank
    
    
    45,000,000
    
    
    40,000,000Other
      borrowed funds
    
    
    1,000,000
    
    
    900,000Accrued
      interest and other liabilities
    
    
    5,284,722
    
    
    5,271,556Total
      liabilities
    
    
    691,788,605
    
    
    647,537,486Stockholders'
      equityCommon
      stock, $3.00 par value; 10,000,000 shares authorized; 5,281,104 and
      5,287,100 shares issued in 2005 and 2004, respectively; 5,256,807 and
      5,249,604 shares outstanding in 2005 and 2004,
respectively
    
    
    15,837,681
    
    
    15,855,669Additional
      paid-in capital
    
    
    34,234,758
    
    
    34,381,141Retained
      earnings
    
    
    10,280,173
    
    
    8,878,633Treasury
      stock, at cost; 24,297 and 37,496 shares in 2005 and 2004,
      respectively
    
    
    (332,755
    )
    
    (497,127
    )Accumulated
      other comprehensive income
    
    
    (927,219
    )
    
    361,509Total
      stockholders' equity
    
    
    59,092,638
    
    
    58,979,825$
    750,881,243
    
    $
    706,517,311




See
accompanying notes to consolidated financial statements.


3





GEORGIA
BANK FINANCIAL CORPORATION AND SUBSIDIARY


Consolidated Statements of Income





(Unaudited)





Three Months EndedMarch 31,2005
    
    2004Interest
      income:Loans,
      including fees
    
    $
    8,243,538
    
    $
    6,640,344Investment
      securities
    
    
    1,764,542
    
    
    1,706,843Federal
      funds sold
    
    
    55,607
    
    
    8,224Interest-bearing
      deposits in other banks
    
    
    2,433
    
    
    29Total
      interest income
    
    
    10,066,120
    
    
    8,355,440Interest
      expense:Deposits
    
    
    2,645,590
    
    
    1,639,538Federal
      funds purchased and securities sold under repurchase
      agreements
    
    
    271,970
    
    
    177,388Other
      borrowings
    
    
    507,827
    
    
    432,107Total
      interest expense
    
    
    3,425,387
    
    
    2,249,033Net
      interest income
    
    
    6,640,733
    
    
    6,106,407Provision
      for loan losses
    
    
    471,694
    
    
    388,723Net
      interest income after provision for loan losses
    
    
    6,169,039
    
    
    5,717,684Noninterest
      income:Service
      charges and fees on deposits
    
    
    1,211,050
    
    
    1,058,907Gain
      on sales of loans
    
    
    1,042,183
    
    
    1,276,680Investment
      securities gains, net
    
    
    791
    
    
    80,751Retail
      investment income
    
    
    81,963
    
    
    95,555Trust
      service fees
    
    
    156,912
    
    
    122,239Increase
      in cash surrender value of bank-owned life insurance
    
    
    82,789
    
    
    125,263Miscellaneous
      income
    
    
    125,102
    
    
    99,332Total
      noninterest income
    
    
    2,700,790
    
    
    2,858,727Noninterest
      expense:Salaries
    
    
    2,749,539
    
    
    2,513,124Employee
      benefits
    
    
    809,444
    
    
    766,855Occupancy
      expenses
    
    
    673,093
    
    
    619,164Other
      operating expenses
    
    
    1,505,162
    
    
    1,699,930Total
      noninterest expense
    
    
    5,737,238
    
    
    5,599,073Income
      before income taxes
    
    
    3,132,591
    
    
    2,977,338Income
      tax expense
    
    
    1,048,602
    
    
    971,248Net
      income
    
    $
    2,083,989
    
    $
    2,006,090(continued
    )





4





GEORGIA
BANK FINANCIAL CORPORATION AND SUBSIDIARY


Consolidated
Statements of Income





(Unaudited)





Three
      Months EndedMarch
      31,2005
    
    2004Basic
      net income per share
    
    $
    0.40
    
    $
    0.38Diluted
      net income per share
    
    $
    0.39
    
    $
    0.38Weighted
      average common shares outstanding
    
    
    5,253,526
    
    
    5,247,204Weighted
      average number of common and common equivalent shares
      outstanding
    
    
    5,331,762
    
    
    5,324,089





See
accompanying notes to consolidated financial statements.





5





GEORGIA
BANK FINANCIAL CORPORATION AND SUBSIDIARY


Consolidated Statements of Cash Flows


(Unaudited)


Three
      Months Ended March 31,2005
    
    2004Cash
      flows from operating activitiesNet
      income
    
    $
    2,083,989
    
    $
    2,006,090Adjustments
      to reconcile net income to net cash provided by operating
      activitiesDepreciation
      and amortization
    
    
    359,531
    
    
    313,172Provision
      for loan losses
    
    
    471,694
    
    
    388,723Net
      investment securities gains
    
    
    (791
    )
    
    (80,751
    )Net
      amortization of premium on investment securities
    
    
    93,823
    
    
    72,332Increase
      in CSV of bank owned life insurance
    
    
    (82,789
    )
    
    (125,263
    )Gain
      on disposal of premises and equipment
    
    
    -
    
    
    (5,682
    )Gain
      on the sale of other real estate
    
    
    (4,150
    )
    
    -Gain
      on sales of loans
    
    
    (1,042,183
    )
    
    (1,276,680
    )Real
      estate loans originated for sale
    
    
    (52,982,473
    )
    
    (57,843,342
    )Proceeds
      from sales of real estate loans
    
    
    53,967,068
    
    
    60,432,988Decrease
      in accrued interest receivable
    
    
    35,557
    
    
    349,767Increase
      in other assets
    
    
    (142,735
    )
    
    (87,828
    )Increase
      (decrease) in accrued interest and other liabilities
    
    
    13,166
    
    
    (391,850
    )Net
      cash provided by operating activities
    
    
    2,769,707
    
    
    3,751,676Cash
      flows from investing activities:Proceeds
      from sales of available for sale securities
    
    
    4,232,172
    
    
    8,019,697Proceeds
      from maturities of available for sale securities
    
    
    3,779,820
    
    
    18,450,920Proceeds
      from maturities of held to maturity securities
    
    
    -
    
    
    365,000Purchase
      of available for sale securities
    
    
    (23,516,802
    )
    
    (23,663,999
    )Purchase
      of Federal Home Loan Bank stock
    
    
    (380,600
    )
    
    -Net
      increase in loans
    
    
    (29,847,361
    )
    
    (27,140,068
    )Purchases
      of premises and equipment
    
    
    (247,807
    )
    
    (579,564
    )Proceeds
      from sale of other real estate
    
    
    57,579
    
    
    -Proceeds
      from sale of premises and equipment
    
    
    -
    
    
    34,253Net
      cash used in investing activities
    
    
    (45,922,999
    )
    
    (24,513,761
    )Cash
      flows from financing activities:Net
      increase in deposits
    
    
    34,429,774
    
    
    32,366,324Net
      increase (decrease) in federal funds purchased and securities sold under
      repurchase agreements
    
    
    4,708,179
    
    
    (15,534,861
    )Advances
      from Federal Home Loan Bank
    
    
    5,000,000
    
    
    5,000,000Proceeds
      from other borrowed funds
    
    
    100,000
    
    
    -Principal
      payments on other borrowed funds
    
    
    -
    
    
    (300,000
    )Payment
      of cash dividends
    
    
    (682,449
    )
    
    (682,136
    )Net
      cash provided by financing activities
    
    
    43,555,504
    
    
    20,849,327(continued
    )





6





GEORGIA
BANK FINANCIAL CORPORATION AND SUBSIDIARY


Consolidated
Statements of Cash Flows


(Unaudited)




Three
      Months Ended March 31,2005
    
    2004Net
      increase in cash and cash equivalents
    
    $
    402,212
    
    $
    87,242Cash
      and cash equivalents at beginning of period
    
    
    26,024,197
    
    
    15,721,884Cash
      and cash equivalents at end of period
    
    $
    26,426,409
    
    $
    15,809,126Supplemental
      disclosures of cash paid during the period for:Interest
    
    $
    3,601,419
    
    $
    2,601,926Income
      taxes
    
    $
    100,000
    
    $
    150,000





See
accompanying notes to consolidated financial statements.




7





GEORGIA
BANK FINANCIAL CORPORATION AND SUBSIDIARY





Notes to Consolidated Financial Statements





March 31,
2005





Note 1 -
Basis of Presentation ****





The
accompanying consolidated financial statements include the accounts of Georgia
Bank Financial Corporation and its wholly-owned subsidiary, Georgia Bank &
Trust Company (the “Company” or the “Bank”). Significant intercompany
transactions and accounts are eliminated in consolidation.





The
financial statements for the three months ended March 31, 2005 and 2004 are
unaudited and have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations. These consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements and footnotes included in the Company's annual report on
Form 10-K for the year ended December 31, 2004.





In the
opinion of management, all adjustments necessary to present fairly the financial
position and the results of operations and cash flows for the interim periods
have been made. All such adjustments are of a normal recurring nature. The
results of operations for the three months ended March 31, 2005 are not
necessarily indicative of the results of operations which the Company may
achieve for the entire year.





Some
items in the prior period financial statements were restated to conform to the
current presentation.





Note 2 -
Recent Accounting Pronouncements





In March
2004, the Emerging Issues Task Force (the Task Force) reached a consensus on
Issue 03-1, *Meaning
of Other Than Temporary Impairment* (Issue
03-1). The Task Force reached a consensus on an other-than-temporary impairment
model for debt and equity securities accounted for under SFAS No. 115, *Accounting
for Certain Investments in Debt and Equity Securities* , and
cost method investments. The basic model development by the Task Force in
evaluating whether an investment within the scope of Issue 03-01 is
other-than-temporarily impaired is as follows: Step 1: Determine whether the
investment is impaired. An investment is impaired if its fair value is less than
its cost. Step 2: Evaluate whether the impairment is other than-than-temporary.
Step 3: If the impairment is other-than-temporary, recognize an impairment loss
equal to the difference between the investment’s cost and its fair value. In
September 2004, the FASB agreed to delay the requirement to record impairment
losses under Issue 03-01. The approved delay will apply to all securities within
the scope of Issue 03-01 and is expected to end when new guidance is issued and
comes into effect. The delay did not affect the disclosure requirements of Issue
03-01. The Company will continue to monitor changes to Issue 03-01, but does not
believe that it will have a material impact on the Company’s financial position
or results of operations.





8





SFAS
No. 123 (Revised 2004), *Accounting
for Stock-Based Compensation* , will
require most public entities, effective at the beginning of the first annual
period beginning after June 15, 2005, to compute the fair value of options at
the date of grant and to recognize such costs as compensation expense
immediately if there is no vesting period or ratably over the vesting period of
the options. Due to the SEC’s April 15, 2005, deferral of the effective date to
the beginning of the first annual period beginning after June 15, 2005, the Bank
has chosen not to adopt the cost recognition principles of this statement for
2005. The Bank will adopt SFAS No. 123 (Revised 2004) as of January 1,
2006.





Note 3 -
Comprehensive Income





Other
comprehensive income (loss) for the Company consists of net unrealized gains and
(losses) on investment securities which were ($1,288,728) for the three months
ended March 31, 2005 compared to $719,411 for the three months ended March 31,
2004. Total comprehensive income for the three months ended March 31, 2005 was
$795,261 compared to $2,725,501 for the three months ended March 31, 2004.





Note 4 -
Stock-based Compensation





The
Company applies Accounting Principles Board (APB) Opinion No. 25, *Accounting
for Stock Issued to Employees* , and
related interpretations in accounting for its stock option plans. Accordingly
compensation cost is measured as the excess, if any, of the quoted market price
of the Company’s stock at the date of grant over the amount an employee must pay
to acquire the stock. Had compensation cost been determined based upon the fair
value of the options at the grant dates consistent with the method recommended
by SFAS No. 123, on a pro forma basis, the Company’s net income and income per
share, on a pro forma basis, for the three months ended March 31, 2005 and 2004
is indicated below.





Three
      Months EndedMarch
      31,2005
    
    2004Net
      income
    
    $
    2,083,989
    
    $
    2,006,090Deduct:
      Total stock-basedCompensation
      expense determined Under fair value based method, net of related tax
      effect
    
    
    54,261
    
    
    51,969Pro
      Forma, net income
    
    $
    2,029,728
    
    $
    1,954,121Basic
      net income per share:As
      reported
    
    $
    0.40
    
    $
    0.38Pro
      forma
    
    $
    0.39
    
    $
    0.37(continued
    )




9




Three
      Months EndedMarch
      31,2005
    
    2004Diluted
      net income per share:As
      reported
    
    $
    0.39
    
    $
    0.38Pro
      forma
    
    $
    0.38
    
    $
    0.37








Note 5 -
Cash Dividend Declared





On
January 28, 2005, the Company declared a quarterly cash dividend of $0.13 per
share on outstanding shares. The dividend was paid on February 18, 2005 to
shareholders of record as of February 2, 2005.





On April
20, 2005, the Company declared a quarterly cash dividend of $0.13 per share on
outstanding shares. The dividend is payable on May 20, 2005 to shareholders of
record as of May 4, 2005.




10





**Item
2.   Management’s Discussion and Analysis of
Financial Condition and** **Results of Operations**





Overview





The Bank
was organized by a group of local citizens and commenced business on August 28,
1989. It began operations with one branch. Today, the Bank operates eight full
service branches in Richmond and Columbia counties in Augusta, Martinez, and
Evans, Georgia. The Bank operates two mortgage origination offices in Augusta,
Georgia, and Savannah, Georgia. The Savannah, Georgia office also offers
construction lending services. Bank and mortgage operations are located in
Augusta, Georgia in two operations campuses located in close proximity to the
main office in Augusta, Georgia. Wealth management, trust, and retail investment
services are located in the main office. The Bank is Augusta’s largest community
banking company.





Richmond
and Columbia counties have a diversified economy based primarily on government,
transportation, public utilities, health care, manufacturing, construction, and
wholesale and retail trade. Augusta is one of the leading medical centers in the
Southeast. The 2003 population of the Augusta-Richmond County, GA-SC
metropolitan area was 340,048, the second largest in Georgia.





The
Bank’s services include the origination of residential and commercial real
estate loans, construction and development loans, and commercial and consumer
loans. The Bank also offers a variety of deposit programs, including
noninterest-bearing demand, interest checking, money management, savings, and
time deposits. In the combined Richmond and Columbia counties, the Bank had
16.84% of all deposits and was the second largest depository institution at June
30, 2004, as cited from the Federal Deposit Insurance Corporation’s website.
Securities sold under repurchase agreements are also offered. Additional
services include wealth management, trust, retail investment, and mortgage. As a
matter of practice, most mortgage loans are sold in the secondary market;
however, some mortgage loans are placed in the portfolio based on marketing and
balance sheet considerations. The Bank continues to concentrate on increasing
its market share through various new deposit and loan products and other
financial services and by focusing on the customer relationship management
philosophy. The Bank is committed to building life-long relationships with its
customers, employees, shareholders, and the communities it serves.





The
Bank’s primary source of income is from its lending activities followed by
income from its investment activities, service charges and fees on deposits, and
gain on sale of mortgage loans in the secondary market. Loan interest income
increased during the first quarter of 2005 as compared to the first quarter of
2004 due to rising interest rates and increased volumes while gain on sales of
mortgage loans decreased due to lower production levels. Service charges and
fees on deposits increased for the first quarter of 2005 as a result of new
retail checking account products introduced in March 2004. Both trust services
and retail investments generated record income in 2004 and trust services income
increased for the three months ended March 31, 2005, as compared with the three
months ended March 31, 2004, while retail investment income showed a slight
decline. The Bank is focusing on the expansion of its wealth management area.





11




The Bank
continues to experience steady growth. Over the past five years, assets grew
from $405.8 million at December 31, 2000 to $706.5 million at December 31, 2004.
At March 31, 2005, assets were $750.9 million. From year end 2000 to year end
2004, loans increased $210.6 million, and deposits increased $245.9 million.
From December 31, 2004 to March 31, 2005, loans increased $29.4 million and
deposits increased $34.4 million. Also, from 2000 to 2004, return on average
equity increased from 12.58% to 15.50% and return on average assets increased
from 1.08% to 1.29%. At March 31 2005, return on average assets was 1.17% and
return on average equity was 14.14%. Net income for the year ended 2000 was $4.0
million compared to net income of $8.7 million at year end 2004. Net income for
the quarter ended March 31, 2005 was $2.1 million. The Company has reached a
level of maturity evidenced by long-term financial performance and stability
that resulted in cash dividends of $0.13 per share paid for each quarter of
2004. Subsequently, on January 28, 2005 and April 20, 2005 the Company declared
cash dividends of $0.13 per share.





The Bank
meets its liquidity needs by managing cash and due from banks, federal funds
purchased and sold, maturity of investment securities, paydowns from
mortgage-backed securities, and draws on lines of credit. Additionally,
liquidity can be managed through structuring deposit and loan maturities. The
Bank funds loan and investment growth with core deposits, securities sold under
repurchase agreements and wholesale borrowings. During inflationary periods,
interest rates generally increase. When interest rates rise, variable rate loans
and investments produce higher earnings, however, deposit and other borrowings
interest expense and operating expenses also rise. The Bank monitors its
interest rate risk as it applies to income in a ramp up and down annually 200
basis points (2%) scenario and as it applies to economic value of equity in a
shock up and down 200 (2%) basis points scenario. The Bank monitors operating
expenses through responsibility center budgeting.





Forward-Looking
Statements





Georgia
Bank Financial Corporation (the “Company”) may, from time-to-time, make written
or oral forward-looking statements, including statements contained in the
Company’s filings with the Securities and Exchange Commission (the “Commission”)
and its reports to shareholders. Statements made in such documents, other than
those concerning historical information, should be considered forward-looking
and subject to various risks and uncertainties. Such forward-looking statements
are made based upon management’s belief as well as assumptions made by, and
information currently available to, management pursuant to “safe harbor”
provisions of the Private Securities Litigation Reform Act of 1995. The
Company’s actual results may differ materially from the results anticipated in
forward-looking statements due to a variety of factors, including unanticipated
changes in the Bank’s local economy and in the national economy; governmental
monetary and fiscal policies, deposit levels, loan demand, loan collateral
values and securities portfolio values; difficulties in interest rate risk
management; the effects of competition in the banking business; changes in
governmental regulation relating to the banking industry, including regulations
relating to branching and acquisitions; failure of assumptions underlying the
establishment of reserves for loan losses, including the value of collateral
underlying delinquent loans; and other factors. The Company cautions that such
factors are not exclusive. The Company does not undertake to update any
forward-looking statement that may be made from time to time by, or on behalf
of, the Company.





12





Critical
Accounting Policies





The
accounting and financial reporting policies of the Company conform to accounting
principles generally accepted in the United States of America and to general
practices within the banking industry. Of these policies, management has
identified the allowance for loan losses as a critical accounting policy that
requires difficult subjective judgment and is important to the presentation of
the financial condition and results of operations of the Company.





The
allowance for loan losses is established through a provision for loan losses
charged to expense, which affects the Company’s earnings directly. Loans are
charged against the allowance for loan losses when management believes that the
collectibility of the principal is unlikely. Subsequent recoveries are added to
the allowance. The allowance is an amount that management believes will be
adequate to absorb losses on existing loans that become uncollectible, based on
evaluations of the collectibility of loans. The evaluations take into
consideration such factors as changes in the nature and volume of the loan
portfolio, historical loss rates, overall portfolio quality, review of specific
problem loans, and current economic conditions and trends that may affect a
borrower’s ability to repay.





The
Company segments its allowance for loan losses into the following four major
categories: 1) identified losses for impaired loans; 2) general reserves for
Classified/Watch loans; 3) general reserves for loans with satisfactory ratings;
4) general reserves based on economic and market risk qualitative factors. Risk
ratings are initially assigned in accordance with the Bank’s loan and collection
policy. An organizationally independent department reviews grade assignments on
an ongoing basis. Management reviews current information and events regarding a
borrower’s financial condition and strengths, cash flows available for debt
repayment, the related collateral supporting the loan and the effects of known
and expected economic conditions. When the evaluation reflects a greater than
normal risk associated with the individual loan, management classifies the loan
accordingly. If the loan is determined to be impaired, management allocates a
portion of the allowance for loan losses for that loan based upon the present
value of future cash flows discounted at the loan’s effective interest rate, the
fair value of the collateral as the measure for the amount of the impairment or
regulatory guidance. Cash receipts for accruing loans are applied to principal
and interest under the contractual terms of the loan agreement, where cash
receipts on impaired and nonaccrual loans for which the accrual of interest has
been discontinued are applied first to principal and then to interest income.
Impaired and Classified/Watch loans are aggressively monitored. The reserves for
loans rated satisfactory are further subdivided into various types of loans as
defined by call report codes. Qualitative factors are based upon economic,
market and industry conditions that are specific to the Company’s two local
county markets. These qualitative factors include, but are not limited to,
national and local economic conditions, bankruptcy trends, unemployment trends,
loan concentrations, dependency upon government installations and facilities,
and competitive factors in the local market. These allocations for the
qualitative factors are included in the various individual components of the
allowance for loan losses. The qualitative factors are subjective in nature and
require considerable judgment on the part of the Company’s management. However,
it is the Company’s opinion that these factors represent uncertainties in the
Bank’s business environment that must be factored into the Company’s analysis of
the allowance for loan losses.





13





Performance
Overview -- Net Income





The
Company’s net income for the first quarter of 2005 was $2,084,000 which was an
increase of $78,000 (3.9%) compared to net income of $2,006,000 for the first
quarter of 2004. Diluted net income per share for the three months ended March
31, 2005 was $0.39 compared to $0.38 for the three months ended March 31, 2004.
The increase in net income in 2005 compared to 2004 was primarily a result of
increases in net interest income, somewhat offset by a decrease in noninterest
income and increase in noninterest expense. Both loan interest income and
deposit interest expense increased due to higher interest rates and increased
volumes. The provision for loan losses increased for the three months ended
March 31, 2005 as compared to the three months ended March 31, 2004 due to an
increase in loan volume. Factors contributing to the decrease in noninterest
income were a decrease in the gain on sale of mortgage loans in the secondary
market due to lower volumes and a smaller decrease in gains on investment
securities somewhat offset by increases in service charges and fees on deposits.
The new retail checking accounts generated increases in NSF fees and ATM income,
somewhat offset by decreases in service charges. Noninterest expense increased
in the first quarter of 2005 compared to the first quarter of 2004 primarily due
to increases in salaries, somewhat offset by decreases in other operating
expenses. Salary increases are attributable to company growth and mortgage
commissions. Occupancy expenses increased due to the operations of the Walton
Way Operations Complex and the Cotton Exchange branch. Significant changes in
other operating expenses include a decrease in loan costs for a $150,000 loss
that was recorded in the first quarter of 2004 for a fraudulent appraisal on a
mortgage loan that was sold in the secondary market, decreases in processing
expenses attributable to ATM processing, new retail checking products, and the
expiration of commissions due under an overdraft protection contract as well as
increases in trust advisory fees and professional fees for SOX 404
compliance.





Total
assets of $750.9 million at March 31, 2005 reflects an increase of $44.4 million
(6.3%) from year-end 2004. This increase is primarily attributable to higher
loan and investment balances since December 2004. Total loans at March 31, 2005
were $524.0 million which represented an increase of $29.8 million (6.0%) from
December 31, 2004. Since December 31, 2004 investment securities increased $13.8
million (8.9%). These increases were funded by increases in total deposits of
$34.4 million (6.2%), increases in Federal Home Loan Bank advances of $5.0
million (12.5%), increases in securities sold under repurchase agreements of
$4.7 million (10.6%), and net income of $2.1 million less dividends paid of
$682,000.





14





The
annualized return on average assets for the Company was 1.17% for the three
months ended March 31, 2005, compared to 1.26% for the same period last year.
While total assets have increased $97.1 million since first quarter 2004, net
income has only increased $78,000, resulting in a decrease in ROA. The $534,000
increase in net interest income was somewhat offset by a $158,000 decrease in
noninterest income and increases of $138,000 in noninterest expense and $155,000
in income tax expense. The annualized return on average stockholders’ equity was
14.14% for the three months ended March 31, 2005 compared to 14.76% for the
comparable period in 2004. The decrease is primarily attributable to the
continued increase in stockholders’ equity.





Net
Interest Income





Net
interest income increased $534,000 (8.75%) in the first quarter of 2005 compared
to the first quarter of 2004. Higher interest rates and increased volumes
resulted in increases in both interest income and interest expense. Interest
income on loans increased $1,603,000 (24.1%) during the first quarter of 2005 as
compared to 2004 and was partially offset by an increase in interest expense on
deposits of $1,006,000 (61.4%) for the same period. Interest expense on federal
funds purchased and securities sold under repurchase agreements increased
$95,000 (53.3%) primarily due to higher interest rates while interest expense on
other borrowings increased $76,000 (17.5%) primarily due to increased volumes of
Federal Home Loan Bank borrowings. Interest income on investment securities
increased $58,000 (3.4%) over first quarter 2004 due to increased volume.
Interest-earning assets at March 31, 2005 increased $89.6 million (14.6%) over
March 31, 2004.





The
Company’s net interest margin was 3.93% for the three months ended March 31,
2005 compared to 4.07% for the three months ended March 31, 2004. The decrease
is primarily due to large increases in the cost of funds necessitated by price
competition for deposits and lower investment yields.





Noninterest
Income





Noninterest
income decreased $158,000 (5.5%) for the three month period ended March 31, 2005
as compared to the three-month period ended March 31, 2004. Contributing factors
included decreases in gain on sales of mortgage loans in the secondary market of
$235,000 (18.4%) due to lower mortgage loan volumes resulting from reduced
levels of mortgage refinancing activity and decreases in gains on investment
securities of $80,000 (99.0%) for the three months ended March 31, 2005 compared
to the three months ended March 31, 2004. These decreases were partially offset
by increases in service charges and fees on deposits of $152,000 (14.4%) during
the first quarter of 2005 as compared to 2004, primarily due to increases in NSF
fees and ATM income, somewhat offset by decreases in service charges, all a
result of new retail checking accounts.





15





Noninterest
Expense





Noninterest
expense increased $138,000 (2.5%) during the first quarter of 2005 compared to
the first quarter of 2004. Salary expense increased $236,000 (9.4%) in the first
quarter of 2005 compared to the same period in 2004 due to increases in salaries
and incentive compensation related to company growth as well as increased
mortgage commissions. Despite lower mortgage volumes in the first quarter of
2005, commissions increased in the first quarter of 2005 compared to 2004 as the
result of a reduction in accrued commissions in the first quarter of 2004.
Accrued mortgage commissions were reversed in the first quarter of 2004 to
reflect the decrease in the gain on sale of loans in the first quarter of 2004
as compared with the fourth quarter of 2003. The increase in occupancy expense
of $54,000 (8.7%) over the first quarter of 2004 is primarily due to
depreciation expense on the Walton Way Operations Campus opened in February 2004
and the Cotton Exchange branch which opened in September 2004. Other operating
expenses decreased $195,000 (11.5%) over the three months ended March 31, 2004
primarily due to a loss of $150,000 recorded in the first quarter of 2004 for a
fraudulent appraisal on a mortgage loan which was sold in the secondary market.
Other significant changes in operating expense for the first quarter of 2005
include a $124,000 (35.6%) decrease in processing expense attributable to moving
ATM processing in-house, retail checking products expense, and the expiration of
the contract to pay commissions for overdraft protection as well as a $51,000
(27.7%) increase in professional fees for trust advisory fees and SOX 404
compliance.





Income
Taxes





Income
tax expense in the first quarter of 2005 totaled $1,049,000, an increase of
$77,000 (8.0%) over the first quarter of 2004. The effective tax rate for the
three months ended March 31, 2005 and 2004 was 33.5% and 32.6%, respectively.
The increase in the effective tax rate is primarily due to a decrease in the
cash surrender value of life insurance and an adjustment to deferred income
taxes in 2004.





Asset
Quality





Table
1 **** shows the
current and prior period amounts of non-performing assets. Non-performing assets
were $2.7 million at March 31, 2005, compared to $3.0 million at December 31,
2004 and $3.2 million at March 31, 2004. The ratio of non-performing assets to
total loans and other real estate was 0.51% at March 31, 2005, compared to 0.60%
at December 31, 2004 and 0.71% at March 31, 2004. The control and monitoring of
non-performing assets continues to be a priority of management.





There
were $29,000 of loans past due and still accruing at December 31, 2004. There
were no loans past due 90 days or more and still accruing at March 31, 2005 and
March 31, 2004.





16




Allowance
for Loan Losses





The
allowance for loan losses represents a reserve for probable loan losses in the
loan portfolio. The adequacy of the allowance for loan losses is evaluated
periodically based on a review of all significant loans, with particular
emphasis on impaired, non-accruing, past due, and other loans that management
believes require special attention. The determination of the allowance for loan
losses is considered a critical accounting policy of the Company. See “Critical
Accounting Policies.”





When
reviewing the allowance for loan losses, it is important to understand to whom
the Company lends. At March 31, 2005, the loan portfolio is comprised of 80.46%
real estate loans, of which 27.30% constitutes construction and acquisition and
development loans. Commercial, financial and agricultural loans comprise 12.15%,
and consumer loans comprise 7.38% of the portfolio.





While the
Company has 80.46% of its loan portfolio secured by real estate loans, this
percentage is not significantly higher than in previous years. Commercial real
estate comprises 31.46% of the loan portfolio and is primarily owner occupied
properties where the operations of the commercial entity provide the necessary
cash flow to service the debt. For this portion of real estate loans, repayment
is not dependent upon liquidation of the real estate. Construction and
development (27.30%) has been an increasingly important portion of the real
estate loan portfolio. The Company carefully monitors the loans in this category
since the repayment of these loans is generally dependent upon the liquidation
of the real estate and is impacted by national and local economic conditions.
The residential category, 18.87% of the portfolio, represents those loans that
the Company chooses to maintain in its portfolio rather than selling into the
secondary market for marketing and competitive reasons. The residential held for
sale category, 2.83% of the portfolio, comprises loans that are in the process
of being sold into the secondary market. The credit has been approved by the
investor and the interest rate locked so that the Company minimizes credit and
interest rate risk with respect to these loans.





The
Company has no large loan concentrations to individual borrowers or industries.
Unsecured loans at March 31, 2005 were $9.8 million. While management uses
available information to recognize losses on loans, future additions to the
allowance may be necessary based on changes in economic conditions. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Company’s allowance for loan losses. Such agencies may
require the Company to recognize additions to the allowance based on their
judgments about information available to them at the time of their
examination.





Additions
to the allowance for loan losses are made periodically to maintain the allowance
at an appropriate level based upon management’s analysis of potential risk in
the loan portfolio. Loans determined to be uncollectible are charged to the
allowance for loan losses and subsequent recoveries are added to the allowance.
A provision for losses in the amount of $472,000 was charged to expense for the
quarter ended March 31, 2005 compared to $389,000 for the quarter ended March
31, 2004. The provision was higher for the three month ended March 31, 2005 as
compared with the three months ended March 31, 2004, due to an increase in loan
volume.





17





At March
31, 2005 the ratio of allowance for loan losses to total loans was 1.58%
compared to 1.60% at December 31, 2004 and 1.62% at March 31, 2004. Management
considers the current allowance for loan losses appropriate based upon its
analysis of the potential risk in the portfolio, although there can be no
assurance that the assumptions underlying such analysis will continue to be
correct.





Liquidity
and Capital Resources





The
Company’s liquidity remains adequate to meet operating and loan funding
requirements. The loan to deposit ratio at March 31, 2005 was 88.6% compared to
88.8% at December 31, 2004 and 88.8% at March 31, 2004. The steady loan to
deposit ratio reflects continued growth of both loans and deposits in proportion
to one another. Deposits at March 31, 2005 and December 31, 2004 include $38.8
million and $34.9 million of brokered certificates of deposit, respectively. The
Company has also utilized borrowings from the Federal Home Loan Bank. The
Company maintains a line of credit with the Federal Home Loan Bank approximating
10% of the Bank’s total assets. Federal Home Loan Bank advances are
collateralized by eligible first mortgage loans, and commercial real estate
loans. These borrowings totaled $45.0 million at March 31, 2005. The Company
maintains repurchase lines of credit with SunTrust Robinson Humphrey, Atlanta,
Georgia, for advances up to $20.0 million and with The Bankers Bank, Atlanta,
Georgia, for advances up to $10.0 million of which no amounts were outstanding
at March 31, 2005. The Company has a federal funds purchased accommodation with
The Bankers Bank, Atlanta, Georgia, for advances up to $16.7 million and with
SunTrust Bank, Atlanta, Georgia for advances up to $10.0 million. Additionally,
liquidity needs can be satisfied by the structuring of the maturities of
investment securities and the pricing and maturities on loans and deposits
offered to customers. The Company also uses retail securities sold under
repurchase agreements to fund growth. Securities sold under repurchase
agreements were $49.3 million at March 31, 2005.





Shareholders’
equity to total assets was 7.9% at March 31, 2005 compared to 8.4% at December
31, 2004. The capital of the Company and the Bank exceeded all required
regulatory guidelines at March 31, 2005. The Company’s Tier 1 risk-based, total
risk-based and leverage capital ratios were 9.92%, 11.17%, and 8.29%,
respectively, at March 31, 2005. Table 2 which follows reflects the current
regulatory capital levels in more detail, including comparisons to the
regulatory minimums.





Management
is not aware of any events or uncertainties that are reasonably likely to have a
material effect on the Company’s liquidity, capital resources or operations.





18





Commitments
and Contractual Obligations





The Bank
is a party to lines of credit with off-balance sheet risk in the normal course
of business to meet the financing needs of its customers. Lines of credit are
unfunded commitments to extend credit. These instruments involve, in varying
degrees, exposure to credit and interest rate risk in excess of the amounts
recognized in the financial statements. The Bank's exposure to credit loss in
the event of nonperformance by the other party to the financial instrument for
unfunded commitments to extend credit and letters of credit is represented by
the contractual amount of those instruments. The Bank evaluates construction and
acquisition and development loans for the percentage completed before extending
additional credit. The Bank follows the same credit policies in making
commitments and contractual obligations as it does for on-balance sheet
instruments.





Unfunded
commitments to extend credit where contract amounts represent potential credit
risk totaled $151.7 million at March 31, 2005. These commitments are primarily
at variable interest rates.





The
Company’s commitments are funded through internal funding sources of scheduled
repayments of loans and sales and maturities of investment securities available
for sale or external funding sources through acceptance of deposits from
customers or borrowings from other financial institutions.





The
following table is a summary of the Company’s commitments to extend credit,
commitments under contractual leases as well as the Company’ contractual
obligations, consisting of deposits, FHLB advances, which are subject to early
termination options, and borrowed funds by contractual maturity date for the
next five years.








**Commitments
      and**
      **Contractual
      Obligations**
    
    **Due
      in**
      **1
      Year**
    
    **Due
      in**
      **2
      Years**
    
    **Due
      in**
      **3
      Years**
    
    **Due
      in**
      **4
      Years**
    
    **Due
      in**
      **5
      Years**Lines
      of credit
    
    $
    151,734
    
    
    -
    
    
    -
    
    
    -
    
    
    -Lease
      agreements
    
    
    90
    
    
    76
    
    
    40
    
    
    -
    
    
    -Deposits
    
    
    258,637
    
    
    118,789
    
    
    85,981
    
    
    36,271
    
    
    36,709Securities
      sold under repurchase agreements
    
    
    49,289
    
    
    -
    
    
    -
    
    
    -
    
    
    -FHLB
      advances
    
    
    5,000
    
    
    -
    
    
    5,000
    
    
    -
    
    
    17,000Other
      borrowings
    
    
    1,000
    
    
    -
    
    
    -
    
    
    -
    
    
    -Total
      commitments and contractual obligations
    
    $
    465,750
    
    $
    118,865
    
    $
    91,021
    
    $
    36,271
    
    $
    53,709








Although
management regularly monitors the balance of outstanding commitments to fund
loans to ensure funding availability should the need arise, management believes
that the risk of all customers fully drawing on all these lines of credit at the
same time is remote.





19





Effects
of Inflation and Changing Prices





Inflation
generally increases the cost of funds and operating overhead and to the extent
loans and other assets bear variable rates, the yields on such assets. Unlike
most industrial companies, virtually all of the assets and liabilities of a
financial institution are monetary in nature. As a result, interest rates
generally have a more significant impact on the performance of a financial
institution than the effects of general levels of inflation. Although interest
rates do not necessarily move in the same direction and to the same extent as
the prices of goods and services, increases in inflation generally have resulted
in increased interest rates. In addition, inflation can increase a financial
institution's cost of goods and services purchased, the cost of salaries and
benefits, occupancy expense and similar items. Inflation and related increases
in interest rates generally decrease the market value of investments and loans
held and may adversely affect liquidity, earnings, and stockholders' equity.
Mortgage originations and refinancings tend to slow as interest rates increase,
and can reduce the Company's earnings from such activities and the income from
the sale of residential mortgage loans in the secondary market.








20





**TABLE
1**





**GEORGIA
BANK FINANCIAL CORPORATION AND SUBSIDIARY**


**CONSOLIDATED
FINANCIAL DATA**


*(Dollars
in Thousands)*


*(Unaudited)*





Three
      Months Ended March 31,**PROFITABILITY**
    
    2005
    
    2004Return
      on average assets *
    
    
    1.17
    %
    
    1.26
    %Return
      on average equity *
    
    
    14.14
    %
    
    14.76
    %**ALLOWANCE
      FOR LOAN LOSSES**Beginning
      balance, January 1
    
    $
    7,930
    
    $
    7,278Provision
      charged to expense
    
    
    472
    
    
    388Recoveries
    
    
    259
    
    
    185Loans
      charged off
    
    
    (358
    )
    
    (449
    )Ending
      balance, March 31
    
    $
    8,303
    
    $
    7,402




**NON-PERFORMING
      ASSETS**
    
    March
      31, 2005
    
    December
      31, 2004
    
    March
      31, 2004Non-accrual
      loans
    
    $
    2,652
    
    $
    2,972
    
    $
    3,230Other
      real estate owned
    
    
    0
    
    
    53
    
    
    5Total
      non-performing assets
    
    $
    2,652
    
    $
    3,025
    
    $
    3,235**LOANS
      PAST DUE 90 DAYS OR****MORE
      AND STILL ACCRUING**
    
    $
    0
    
    $
    29
    
    $
    0





*
Annualized




21





**TABLE
2**





**Georgia
      Bank Financial Corporation****and****Georgia
      Bank & Trust Company****Regulatory
      Capital Requirements****March
      31, 2005***(Dollars
      in Thousands)*Actual
    
    Required
      for capitaladequacy purposes
    
    ExcessAmount
    
    Percent
    
    Amount
    
    Percent
    
    Amount
    
    Percent**Georgia
      Bank Financial Corporation**Risk-based
      capital:Tier
      1 capital
    
    $
    59,880
    
    
    9.92
    %
    
    24,139
    
    
    4.00
    %
    
    35,741
    
    
    5.92
    %Total
      capital
    
    
    67,433
    
    
    11.17
    %
    
    48,278
    
    
    8.00
    %
    
    19,155
    
    
    3.17
    %Tier
      1 leverage ratio
    
    
    59,880
    
    
    8.29
    %
    
    28,892
    
    
    4.00
    %
    
    30,988
    
    
    4.29
    %**Georgia
      Bank & Trust Company**Risk-based
      capital:Tier
      1 capital
    
    $
    57,149
    
    
    9.49
    %
    
    24,077
    
    
    4.00
    %
    
    33,072
    
    
    5.49
    %Total
      capital
    
    
    64,683
    
    
    10.75
    %
    
    48,155
    
    
    8.00
    %
    
    16,528
    
    
    2.75
    %Tier
      1 leverage ratio
    
    
    57,149
    
    
    7.93
    %
    
    28,827
    
    
    4.00
    %
    
    28,322
    
    
    3.93
    %




22





**Item 3. Quantitative and Qualitative Disclosures About Market
Risk**





As of
March 31, 2005, there were no substantial changes in the interest rate
sensitivity analysis or the sensitivity of market value of portfolio equity for
various changes in interest rates calculated as of December 31, 2004. The
foregoing disclosures related to the market risk of the Company should be read
in conjunction with the Company’s audited consolidated financial statements,
related notes and management’s discussion and analysis of financial condition
and results of operations for the year ended December 31, 2004 included in the
Company’s 2004 Annual Report on Form 10-K.





**Item 4. Controls and Procedures**





As of the
end of the period covered by this report, the Company carried out an evaluation,
under the supervision and with the participation of the Company’s management,
including the Company’s President and Chief Executive Officer (principal
executive officer) and its Executive Vice President and Chief Operating Officer
(principal financial officer), of the effectiveness of the design and operation
of the Company’s disclosure controls and procedures pursuant to Exchange Act
Rule 13a-15. Based upon that evaluation, such officers concluded that the
Company’s disclosure controls and procedures are effective in timely alerting
them to material information relating to the Company (including its consolidated
subsidiaries) that is required to be included in the Company’s periodic filings
with the Securities and Exchange Commission. There have been no significant
changes in the Company’s internal controls or, to the Company’s knowledge, in
other factors that could significantly affect those internal controls subsequent
to the date the Company carried out its evaluation, and there have been no
corrective actions with respect to significant deficiencies or material
weaknesses.





23





**Part
II**


**OTHER
INFORMATION**








**Item 1.**
    **Legal
      Proceedings**





There are
no material pending legal proceedings to which the Company or any of its
subsidiaries is a party or of which any of their property is
subject.





**Item 2.**
    **Unregistered
      Sales of Equity Securities and Use of
Proceeds**





**Issuer
Purchases of Equity Securities**





On April
15, 2004, the Company announced the commencement of a stock repurchase program,
pursuant to which it will, from time to time, repurchase up to 100,000 shares of
its outstanding stock. The program does not have a stated expiration date. No
stock repurchase programs were terminated during the first quarter of 2005.
There were no shares repurchased under an existing stock repurchase plan or
otherwise during the first quarter of 2005.





**Item 3.**
    **Defaults
      Upon Senior Securities**





Not
applicable





**Item 4.**
    **Submission
      of Matters to a Vote of Security
Holders**





None




**Item 5.**
    **Other
      Information**








None





**Item 6.**
    **Exhibits**








31.1
    Certification of Chief Executive Officer Pursuant to
      Section 302 of the Sarbanes-Oxley Act of
2002.





31.2
    Certification of Chief Financial Officer Pursuant to
      Section 302 of the Sarbanes-Oxley Act of
2002.





32.1
    Certification of Chief Executive Officer and Chief
      Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.




24





GEORGIA
BANK FINANCIAL CORPORATION


Form 10-Q Signatures








Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.





GEORGIA
      BANK FINANCIAL CORPORATIONDate:
    May 6, 2005
    
    
    By:
    /s/ Ronald L. ThigpenRonald
      L. ThigpenExecutive
      Vice President, ChiefOperating
      Officer (Duly AuthorizedOfficer
      of Registrant and PrincipalFinancial
      Officer)




25